Brno Gets Thumbs-Up from Major Credit Rating Agency

Moody’s credit rating agency has just released details of its latest periodic review of the City of Brno and confirmed the appropriateness of its Aa3 rating. This is important for when the city borrows money and affects the interest rate it has to pay. Photo credit: KK / Brno Daily.

Brno, Jul 27 (BD) – Last October Moody’s upgraded the global scale rating of the city of Brno to Aa3, the highest it has ever been and is classified as very high investment grade. This upgrade was also applied to the cities of Prague, Ostrava and Prostejov. At the same time the South Moravian Region was upgraded from a3 to a1, one grade lower than Brno. This was all on the back of the raising of the Czech National government’s sovereign credit profile to Aa3 with a stable outlook. 

For major companies, state bodies and even national governments the major credit rating agencies have a significant effect on an institution’s ability to borrow money in the financial markets and the interest that has to be paid. Moody’s is one of the big 3 rating agencies and its ratings are widely used in assessing credit risk. This rating also has an effect on tenders for contracts as it affects the cost of business credit insurance and factoring.

This month Moody’s carried out a periodic review of the rating for Brno. They highlighted that ‘the city’s decreasing level of debt, steady operational performance, huge liquid reserves and a moderate probability that the Government of the Czech Republic (Aa3) would support the city with necessary liquidity if it were to face acute financial distress.’ They also point out that the city has been achieving high operational surpluses which have funded the city’s capital expenditure. The debt (23.4% of operational revenues) is fully covered by its liquid reserves and over 95 percent of the city’s direct and indirect debt is composed of low interest European Investment Bank loans.

In their original assessment for the upgrade key factors were the ‘prudent’ financial planning and multi-year forecasting, which enables the city to identify potential pressures in good time, so the plans can be amended. They also recognise historical good governance, especially in relation to transparency and disclosure, policy credibility and budgetary management.

The challenge will be maintaining the low debt levels in the face of the current unprecedented situation. The city has been very active in supporting businesses and some of the financial measures introduced by the Czech government are actually partly financed at a local level.

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